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An international group rejected a proposal to lower the threshold at which countries fall under deeper global scrutiny for not tackling illicit finance, potentially sparing major economies from ending up on a “gray list” of nations with porous defenses against financial crime.

The Financial Action Task Force launched a “strategic review” in 2019 to assess and modernize its processes for conducting mutual evaluations and follow-up reviews of national anti-money laundering frameworks, including procedures governing the International Co-operation Review Group, a panel that supervises the use of FATF’s most powerful tool: the naming and shaming of countries with systemic gaps in their AML regimes.

FATF’s adoption of new procedures in April shined light on the ICRG’s role within the group without meaningfully reforming the process for populating the gray list, which overwhelmingly targets developing nations with limited resources, three sources familiar with the internal deliberations told ACAMS moneylaundering.com.

“There were various proposals, some of which would have had the effect of lowering the threshold, which would have put a lot more FATF members in the [ICRG] process,” a source familiar with the discussions said. “And there was quite a lot of support for them, but they were blocked by FATF members.”

There is little doubt that naming and shaming has strengthened the global financial system by spurring nations to strengthen their AML rules and supervision, pursue cases against financial criminals and more thoroughly grasp their specific exposure to illicit finance.

But the process has at times struggled for legitimacy, not least because FATF until April of last year disclosed very little about the inner workings of the ICRG, which has power to recommend the addition or removal of countries from the group’s blacklist of jurisdictions with significant AML deficiencies and gray list of those subject to “increased monitoring.”

Of the 65 jurisdictions gray-listed or blacklisted by FATF from 2010 to 2020, none are in the Group of 7 industrialized nations while only two, Argentina and Turkey, are in the Group of 20. The vast majority hail from the Global South, and 28 rank in the bottom half of economic output as measured by GDP.

“It’s tricky to go to developing countries and say, ‘I need you to prioritize your AML regime over food security, the electricity grid, global warming … or we’ll put you on the list,'” a second source in favor of reforming the ICRG process said. “And the question you would often get back is: ‘Why are none of you on the list?’ And that’s where the difficulty lies.”

Currently, countries are referred to the ICRG, a committee of officials from FATF’s 39 members, nine regional partners and 20 observer organizations—including the World Bank and United Nations—if they score either “non-compliant” or only “partially compliant” with at least half of FATF’s 40 technical recommendations following their evaluation.

They can also trigger scrutiny by receiving non-compliant or partially compliant scores with three or more of the “big six” technical standards—recommendations 3, 5, 6, 10, 11 and 20—which cover the criminalization of money laundering and terrorist financing, imposition of terrorism-related sanctions, recordkeeping, reporting of suspicious transactions and application of due diligence.

Scoring “low” in two of FATF’s 11 “immediate outcomes” of effectiveness and low or “moderate” in at least seven of the remaining nine also triggers a review by the ICRG. Alternatively, scoring low in at least six of the 11 outcomes also prompts scrutiny by the group, regardless of a nation’s scores in the remaining five.

The ICRG reviews whether countries have made sufficient progress on “key recommended actions” in the 12 months following publication of their mutual evaluation report, and ultimately makes recommendations to FATF’s plenary, a tri-annual summit, on whether a country has qualified for inclusion on the group’s gray list.

Finally, a country can trigger a review by the ICRG pursuant to a nomination by a FATF delegation or regional partner by posing “substantial” threats to the global financial system, though this has only happened once.

In June 2018, FATF gray-listed Pakistan pursuant to a request by the U.S. Pakistan exited the list in October of last year after cracking down on terrorist financiers and enacting a swathe of other reforms.

Accountability

One of the more far-reaching reforms under discussion during the strategic review would have made a single low score in any of the 11 immediate outcomes a criterion for scrutiny by the ICRG, as well as a criterion for gray-listing if the jurisdiction in question failed to resolve the deficiencies within 12 months.

Under the plan, the new threshold would—at least initially—only apply to FATF’s 37 member countries, which includes the G7 nations and other major economies such as China, Russia and Saudi Arabia.

The goal of the plan, sources said, was to provide FATF with means to pressure countries to remedy major weaknesses in specific areas, such as a lack of corporate transparency or a failure to regulate real estate agents or lawyers for AML purposes.

FATF’s members would have signaled their willingness to hold themselves to a higher standard by adopting the plan, and in doing so enhanced the legitimacy of the gray-listing process and the group more broadly, two sources familiar with the discussions said.

The proposal would also have taken into account that even comparatively minor deficiencies in the AML regimes of major economies, financial centers and global real-estate hotspots pose a greater threat to the global financial system than systemic weaknesses in a small economy.

Under the plan, the United States, for example, would have triggered monitoring from the ICRG in 2016 for failing to implement FATF’s standards governing the collection, verification and dissemination of beneficial ownership information.

Canada, Austria, China and Saudi Arabia, which FATF criticized in a September 2018 report for neglecting to pursue cases against money launderers, seize illicit assets and implement sanctions targeting the proliferation of weapons of mass destruction, would also have triggered a deeper review by the ICRG.

The proposal won the support of Britain and several of FATF’s regional partners.

Giles Thomson, head of the U.K. Office of Financial Sanctions Implementation and leader of the United Kingdom’s delegation to FATF, said during an industry event in London three years ago that the group effectively holds countries with systemic weaknesses to account but fails to pressure those that have “major problems in one or two particular areas.”

“There are a number of fairly large countries … that don’t regulate all … DNFBPs [designated non-financial businesses and professions] and show no signs of doing so, and it’s not clear that FATF actually has a real hook to force them to,” Thomson said at the time. “[If] they’re not in the ICRG process, will they actually do it in a timely fashion?”

But sources familiar with the discussions said that signs emerged early on that the proposal lacked support. FATF makes decisions by consensus, which in practice means that only three or four of the group’s 39 members can scuttle a plan by objecting.

“With this proposal, it came closest to a sense of self-interest,” one of the three sources familiar with the discussions told moneylaundering.com. “Having heard countries discuss it and explain their reasons for opposing it, it seemed self-interested.”

Beneficial ownership

A second proposal scuttled during the strategic review would have made a failure to comply with technical recommendations 24 and 25—which mandate that nations have access to timely and accurate information on the beneficial owners of legal arrangements, trusts, companies and other entities—a basis for scrutiny by the ICRG.

The plan would have expanded the “big six” technical recommendations to eight by adding 24 and 25, meaning that a country with non-compliant or partially compliant scores in three of those combined eight technical standards would trigger review by the panel.

“More needs to be done on beneficial ownership, where you only have a 50 percent technical compliance after 20 years,” the first person familiar with the discussions said. “But something as simple as including that in the criteria for ICRG was rejected outright by a number of those countries that it would have impacted in the FATF, and that was really disappointing.”

There was a sense among some delegations, however, that FATF should not pair recommendations 24 and 25 off together, and that adding them to the other six key technical recommendations would risk diluting their significance, a second source familiar with the discussions said.

To ensure that the ICRG focuses on larger economies with the most potential to impact the global financial system, only jurisdictions with at least $5 billion of “financial sector assets” currently qualify for scrutiny by the committee.

Two of the sources said a proposal to raise or otherwise alter that $5 billion “prioritization threshold” also fell short but remains under discussion.

Transparency

FATF did lower the ICRG threshold in one respect following the strategic review.

Draft procedures for the group’s impending fifth round of mutual evaluations indicate that
countries will now enter the ICRG’s deeper-review process if they receive non-compliant or partially compliant ratings in 15 or more of FATF’s 40 technical recommendations, down from the previous 20.

In the 66-page document, the group also outlined plans to assess nations with relatively higher exposures to financial crimes first in the upcoming round of mutual evaluations and shorten the current 10-year cycle of assessments to six years. The new rules will take effect when the next round of evaluations begins next year.

The document for the first time also revealed details of FATF’s system for appointing officials to the ICRG, the panel’s decision-making process, what jurisdictions under deeper review can expect assessors to prioritize, and the process for listing and delisting countries.

Currently, gray-listed nations only receive an action plan—an itemized list of mandatory reforms—from the ICRG at the end of the 12-month “observation period” that follows the publication of their mutual evaluation report.

Under the new procedures, countries will receive an action plan on a much shorter timeframe, and FATF’s evaluators and ICRG members will work together to identify the main areas of concern.

“There’s now more transparency around it [the ICRG process], and there will be an action plan immediately following the mutual evaluation report,” the first source said. “Countries should have a much clearer idea of what they’re aiming to achieve during the observation period.”

FATF also strengthened its procedures for countries under “enhanced follow up”—which covers jurisdictions with deficiencies that appear “significant” but not serious or sufficiently widespread to warrant scrutiny from the ICRG—by lowering the entry thresholds for both technical compliance and efficacy.

The group also shortened the period during which countries must implement all “key recommended actions” listed in their mutual evaluation reports from five years to three.

“The next round of FATF evaluations will be more frequent, more targeted and have more scrutiny, with an increased focus on effectiveness,” a FATF spokesperson said. “This will ensure that assessments will focus more on the biggest risks in the country and spend limited time on lower-risk areas.”

Contact Koos Couvée at kcouvee@acams.org